In a contributed article for Pensions Expert, Tod Trabocco, managing director focused on private credit at Cambridge Associates, outlines some key considerations for investors to take into account when allocating to distressed debt, and explains that pension funds in particular must balance their risk tolerance with their return objectives and current pay requirements.

“As the economic cycle progresses, the prospect of the next downturn – and the likely rise in financial stress – looms larger in institutional investors’ minds, making now the time for pension funds to consider allocations to distressed debt,” he writes.

Further, “these different approaches mean that within the distressed debt universe, different managers take short, medium or long-term perspectives, depending on their appetite to seek a quick exit, play the long game or find a middle path. Layering in all three types of managers should help create a balanced sub-portfolio of distressed debt… Diversifying among different strategies within the distressed debt asset class is worth considering – differentiating between managers can enable investors to allocate constructively through the cycle.”